Shrinking labor force explains drop in unemployment

Last Friday’s release of the Employment Situation report by the Bureau of Labor Statistics showed the economy added 120,000 jobs, dropping the unemployment rate to 8.6 percent. Despite this positive sign, last month’s rate of job growth was still too low to begin healing the labor market. In her analysis of the report, labor economist Heidi Shierholz explained that most of that decline can be explained by the drop in the labor force participation rate from 64.2 percent to 64.0 percent.

“The U.S. is currently 6.3 million jobs below where it was when the recession started. But because the working-age population grows as the population expands, in the nearly four years since the recession started, we would have needed to add around 4.6 million jobs to keep the unemployment rate from rising,” wrote Shierholz.

This means the labor market is lacking roughly 10.9 million jobs.

In this week’s Economic Snapshot, EPI President Lawrence Mishel further explained how the shrinking labor force helped paint a rosier picture of November’s job growth than what the underlying data really show.

Since the share of the population employed last month—58.5 percent— is the same as when the unemployment rate peaked, the growth in employment has only kept pace with the growth of the working-age population.

Top media rely on EPI’s labor-market analyses

In “Will the real jobs number please stand up,” The Washington Post’s Robert Samuelson clarified how a drop in the unemployment could still signal distress in the labor market.

“If people stop searching for work, they’re not counted in the labor force or as unemployed even if they’d like a job. In November, some 487,000 people dropped out of the labor force, too discouraged — many analysts believe — to look for work. Adding these people to the officially unemployed would have produced a jobless rate of 8.9 percent instead of 8.6 percent, according to Heidi Shierholz of the Economic Policy Institute, a liberal think tank,” wrote Samuelson.

In his Wonkblog post, “Weak demand is still the main jobs problem,” The Washington Post’s Ezra Klein quoted from Shierholz’s analysis to argue that weak consumer demand is still the primary drag on the nation’s economy, not taxes or regulatory uncertainty:

If businesses needed workers to meet demand but were reluctant to hire because of some other reason, we would see them strongly ramping up the hours of the workers they have. As it is, there are currently 5.6 million workers who want full-time work but who can only get part-time hours at their job because there is not enough work for them to do.

In “Men best women in scramble for new jobs,” CNNMoney’s Chris Isidore highlighted how the poor labor market has particularly impacted women. Since the labor force started adding jobs, most of the gains have been in male-dominated industries such as construction and manufacturing. Shierholz, who was interviewed for the story, was quoted as saying, “If you look within each industry, women typically saw greater job losses. But men were more concentrated in industries that got hit hardest.”

EPI’s research on wage inequality also in the news

From The Fiscal Times: “As Obama noted, the income divide in America isn’t all that new – it was an issue in Teddy Roosevelt’s time, and it has been surging again since the 1970s. The top 1 percent of the population now possesses 40 percent of all wealth in the country – up from 33 percent 25 years ago. In 1965, according the Economic Policy Institute, CEOs earned 24 times the average American worker. In 2010, the institute says, CEOs earned 234 times more than the average working stiff.”

And MSNBC: “The troubles started when the nation last fell into recession in 2001. From 2000 to 2007, household income was virtually stagnant, said economist Heidi Shierholz with the Economic Policy Institute.”

The Los Angeles Times’ Peter Dreier used EPI’s research to illuminate the economic benefits of extending unemployment benefits.

“The Economic Policy Institute estimates that extending unemployment benefits through next year would create $70 billion in economic activity and a 0.4% increase in GDP,” wrote Dreier.

Jobs policies touted in editorials

Given its poor state, the nation’s economy is in clear need of substantive, remedying policies such as extending the payroll tax cut, which would create jobs and provide substantial aid to working families. EPI’s research on the benefits of extending the payroll tax cut appeared in editorials in the St. Petersburg Times and the Milwaukee Journal Sentinel.

From the St. Petersburg Times: “During 2011, the tax holiday was an economic lifeline. According to the nonpartisan Economic Policy Institute, by reducing employee payroll taxes from 6.2 percent to 4.2 percent, the break added 0.7 percent to the nation’s gross domestic product. That’s significant in an economy that grew at just a 2 percent annualized rate. The tax cuts added $112 billion to Americans’ disposable income, and if allowed to expire the country would lose nearly a million jobs due to the precipitous drop in spending and economic activity, according to EPI.”